Inventories and real rigidities in New Keynesian business cycle models

Abstract

Kryvtsov and Midrigan (2008) study the behavior of inventories in an economy with menu costs, fixed ordering costs and the possibility of stock-outs. This paper extends their analysis to a richer setting that is capable of more closely accounting for the dynamics of the US business cycle. We find that the original conclusion survives in this setting: namely, the model requires an elasticity of real marginal cost to output approximately equal to the inverse intertemporal elasticity of substitution in consumption in order to account for the countercyclicality of the aggregate inventory-to-sales ratio in the data.

Inventories and Optimal Monetary Policy

“…The inventory term can alternatively be interpreted as a taste shifter, which firms invest in to capture additional demand (see Kryvtsov and Midrigan, 2009). Finally, the stock of goods available for sales a t (i) evolves according to:…”

“…Price movements represent a deadweight loss to the economy because of the existence of adjustment costs. 13 An optimizing planner would, therefore, attempt to remove this distortion. This insight is borne out by the impulse response functions for the standard model without inventories in Figure 4.…”

“…Inflation does not respond to the technology shock, nor do labor hours or marginal cost as per the New Keynesian Phillips 12 If R is normally distributed 2σ R < R implies that there is a 95% chance that R will not hit the zero-bound. 13 In a framework with Calvo price setting the deadweight loss comes in form of relative price distortions across firms which lead to misallocation of resources.…”

Inventories and the stockout constraint in general equilibrium

“…In addition, in our model, we can separate output and sales, and hence we can evaluate the model to assess the relative importance of demand and supply shocks. Also Kryvtsov and Midrigan (2010) consider a sticky wage and price model where firms hold inventories to avoid a stockout in the face of a demand shock; see also Kryvtsov and Midrigan (2013) for the role of menu cost in a similar model setup. Their main interest is the role of inventories in explaining impulse response functions (IRFs) to a monetary policy shock and the countercyclicality of the I/S ratio is the focus of their attention.…”

Inventories and optimal monetary policy in a small open economy

“…This assumption greatly simplifies the algebras and can be motivated by assuming that a firm's stock of goods can facilitate sales only if it is larger relative to its competitors. 2 The stock of goods available terms in (2) and (3) can alternatively be thought of as taste shifters which affect the representative household's preference over the intermediate goods (Kryvtsov and Midrigan, 2010). 3…”